Issue 6

Issue 5
Issue 4
Issue 3
Issue 2 (this one)
Issue 1

Heretical Corner

StanInvest           Fri 3 Oct  2003  1PM
S-2-S
What exactly is the relation between interest rates and inflation? (3)

This is the third part of the article.   Experience with past monetary supply expansion as for example, in Weimar Republic, Eastern Europe (Poland in 1970-1990, Russia after 1990 etc) indicates that there is a lag between the time when the monetary supply (currency + credit) has already been increased and injected into the economy, and the time the consumer price indexes rise.   This time lag could be from several months to several yesrs, and is caused by the fact that the increased monetary input and credit supply finds its ways initially into some specific markets (goods and services) creating localized bubbles there, and only after these bubbles burst, it may flow into consumer goods, on which most official inflation indicators are based.     The whole process has three distinctly recognizable phases.

In the Eastern Europe such easy credit was applied exclusively to manufacturing industry, which caused a price inflation of manufacturing tools and products, for example a single transistor components used to cost an equivalent of one weekly wage!

In Ireland of late 1990-ties, a sudden credit expansion related to euro currency and lowering of interest rates has cause a massive house prices bubble, which only after 5 years is filtering itself now into consumer index.

Since the necessary condition of spreading inflation out into the open, is the breakdown of the initial bubbles and since the initial bubbles tend to persist as long as the monetary + credit supply (M)  keep rising, (that is the first derrvative is dM/dt is positive), the initial phase may last as long as the government is able to keep increasing it steadily.    The moment this supply is halted or its rate of increase is reduced, the initial bubble collapse and, in the phase II the excess money seeks other venues, which usually means creation of other secondary speculative bubbles.  These are usually short lived since the original impetus is typically gone, that is, for example once the government has reduced the interest rates to zero, the credit supply cannot keep rising.    Eventually after the secondary bubbles burst, the mass of money is flooding the moarket of everyday goods, which is exacerbated that the foreighn holders of the currency and investment tend to flee the market where there is no more viable speculative venues.  Therefore, in the this phase we are dealing not only with a consumer price inflation but also with a simultaneous collapse of the exchange rate.

To summarize the above:

Phase I:  Increasing of the monetary and credit supply creates a big primary bubble in one area, while other areas do not experiance price changes, or may even experience deflation.   Governments may prolong this phase by increasing monetary supply directly (e.g. printing more money) or increasing credit supply by reducing central bank lending rate.

Phase II:  The reduction of rate of increase of monetary and credit supply causes the primary bubble to collapse and secondary smaller bubbles to appear in other areas.   At this stage some of the excessive capital appears on the market causing some price inflation in selected areas.  Government action cannot prolongue this phase beyond the reduction of the lending rate to zero, unless they also start printing physical money and coinage.   If they do - it may lead eventually to a total breakdown of the economy, destruction or rendering inoperational of the financial and banking system and abandonment of the national currency in favor of foreign currencies or other alternative such as gold or barter (Weimar R. 1930, Poland late 1980-ties, Argentina, USA 2007[*]).   This is called a "hard landing" scenario.

Phase III:  Monetary and credit supply is no longer growing.  Investors (internal and external) abandon the national market for the lack of speculative venues and move elsewhere causing currency exchange rate to collapse and consumer inflation to take off.    Excessive monetary supply created during the preceeding years and held abroad comes home to roost.    Eventually inflation subsides after all the excessive debt (excessive debt always equals previous excessive credit) is wiped out through bancruptcies or withered down by inflation.    This is called a "soft landing" scenario, a la USA 1970-ties.

Stan B.

-----------
*) Just kidding...

StanInvest           Wed 1 Oct  2003  11AM
S-2-S
Deflation/Inflation a physicists' view?

Since our endless dicussions on what is really going on, I feel there is a need to write down a few ideas to make sure that we aren't missing  anything.      Value of goods and services is measured in the units of currency, where currency includes cash: bank notes and coinage in circulation as well as credit supply.   Note that the credit supply has the property of cash, in the sense that it is conserved.   For example, credit supply may fluctuate or be sharply reduced during a given period but the debt it has lead to, stays on.

This is similar to measuring the physical distance in the units of meter, using the wavelength of specific Cesium transition as the reference.   The only difference is that in economy, the reference is not constant, but at present time it appears to have been growing globally for some time at a faster rate than  services and goods.   Therefore, if the units of distance were constanty shrinking, that is there is more and more wavelength per given distance, then  the numerical value of the lemgth of a given object would have been growing.  Similarly, the price of goods and services expressed in those "shrinking" units must increase, in average,

Conversely, if the units are constant then the prices must slowly fall in average if the amount of goods and services grow gradually.  Such was the case in the 19-th century when economies would increase on average by 1.5% per year, while prices were declining by the same amount, in average.

There may be local countertrends caused by local disequilibrium, akin to a situation in thermodynamics when the global rise in entropy may be accompanied by a local decrease of entropy.    A good example are propane/butane gas refrigerators, when the overall release of massive amounts of heat by a gas burner is accompanied by the local (small) decrease in temperature.

Such was the case in recent decades with the US economy creating massive amounts of currency units, credit and cash which did not cause a local price inflation, but to the contrary.   The reason was that this excessive amount of currency was exported abroad and only a small and steadily diminishing part has been reinvested and released locally into the N.American economy.   For example, about 50% of US Treasury bonds has been sold abroad and a similarly large fraction of the US corporate debt is possibly also held off shore.   The remaining portion is held by US financial institution which are also heavily owned by foreigners through stock market investment  or corporate bonds vehicles.    In addition, large portion of US dollar currency (liquidity) is held  abroad since the US$ became a de facto international banking currency standard.

While most excessive currency was being exported, the equivalent amount of manufacturing goods was being imported from countries with lower manufacturing costs.  This situation must have cased price deflation of imported goods, locally in the US.    This appears to be an artefact and a consequence of the speculative overvaluation of the dollar currency in relation to other currencies.     In fact, if we look at this situation from a slightly different angle, it may become clearer:  namely we can treat the US dollar and dollar denominated credit not as currency but  as one of the main products "produced" by the US economy.   For some, largely political reasons, this "product" have become so valuable and sought after abroad, that the US as an "entrprise" was compelled to generate more and more of it, and exchange it for other foreign goods and services.    This lead to a natural decline in the industries whose products were less sought after or those that produced less return on investment (than the financial sector).   In a sense, the falling manufacturing prices are again an artefact of being expressed per unit of a more valuable product generated within the same economy.   Since dollar and credit became so valuable in relation to goods, it is not surprising that goods and prices tend to fall.   For the same reason, the average prices of local labour should have and did fall as well.   This is the same situation that Great Brittain had to go through in the 1914-1960-ties, when the Pound Sterling and London financial "industry" was too strong for too long for its own good.

The whole situation reverses itself in the time scale of decades when this sought after "product" is no longer sought and finds its way back home.   That is what happened to the Pound Stg after the WWII.   It leads inevitably to a massive inflation of other goods and serivices expressed in the units of aboundant, less and less valuable currency.

I would conclude that the prices of goods and services are not in fact inflating or deflating much (except for the natural slow single digit deflationary trend due to improvement in manufacturing and economical expansion).  It is the currencies themselves which seem to deflate, inflate and swing widely in relation to everything else.

Stan

StanInvest           Mon 29 Sep  2003  11AM
S-2-S
Dishonesty or what?

See article: "Early COMEX gold gets footing after fall from high 9/29/2003 10:26:54 AM"

"Intermediate term, it seems like there might be enough spec interest on the long side to try and take the market higher and maybe try $400. I just can't see that as a long-term sustainable price," said James Pogoda, a vice president of precious metals at Mitsubishi International Corp.

I remember this guy (Pogoda) from January 2003.  He was confidently predicting that gold will be stagnant in 2003 and should stay at  only 350$/oz by year end.  It was quite well publicized at that time because he was the famous guy who correctly predicted in 2002 that gold will raise from 300 to 350, so everyone was impressed!

These people make false predictions and they never seem to acknowledge that they were wrong and, what is more important - explain why they were wrong.  This allows them to keep repeating those mistakes, unchecked and unchallenged ad infiniti, and keep making bogus RANDOM predictions based on the phases of the moon or GKW.    This is a superstition at it worst, disguised as "expert" logic.  Unless I am wrong and it goes back to 260$...
Stan

StanInvest           Fri 26 Sep  2003  6PM
S-2-S
Deja Vue

Why do I sense that some old techniques from Berlin and Moscow are being practiced again?

http://www.financialsense.com/editorials/daily/2003/0926.html

Employment Disaster
by Kurt Richebächer
Contributor, The Daily Reckoning
September 25, 2003

In June it was declared that the recession had ended in November 2001. Yet in the 20 months since, payroll employment has declined by a total of about 1 million jobs, or about 8%. In not one of the seven or eight postwar recoveries has there been any employment decline. Immediate strong job growth has been the regular characteristic of all business cycle recoveries. On average, payroll jobs increased 3.8% in the 20 months following the end of recession.

What's more, no letup in job losses is in sight. During the second quarter, widely hailed for its better-than-expected GDP growth, the household measure of employment slumped by 260,000. However, this figure concealed an even greater number of workers - 556,000 - who statistically quit the workforce because they have given up looking for nonexisting jobs.
...
In addition, the Labor Department is employing month for month the same two practices that camouflage the horrible reality. In July, for example, it reported a decline in payrolls by 44,000, while job losses for June were revised upward from 30,000 to 72,000. For May, the retrospective upward revision was even from 17,000 to 70,000.  As such upward revisions of job losses in the prior month have become a regular feature, this practice has the convenient effect of producing correspondingly lower new numbers every month. The same happens, at more moderate scale, with weekly reported claims.

There is still more spinning involved. The government adds every month some 30,000-50,000 imaginary workers to the job total. It is based on the assumption that in an economic recovery a lot of people start their own business. In normal recoveries, they have done so, indeed.

All it needs to activate this statistical job creation is a unilateral decision by the government that the economy is in recovery. Once a year, the statisticians reconcile their assumption with reality by a revision. When they did this in May of this year, 400,000 new jobs that had been reported earlier simply vanished. Such revisions, of course, take place outside the monthly reported job losses. Together, we presume, these statistical casuistries have reduced the reported job losses in the past two years by well over 100,000 per month.
...
In any case, actual, historical experience in the 1970-80s with large-scale government deficit spending has been anything but encouraging. It created more inflation than economic growth.  Over time, rising deficits were rather recognized as impediments to economic growth. Japan's recent experience makes frightening reading. Since 1997, government debt has skyrocketed from 92% to 150% of GDP, rising every year by more than 10% of GDP. Yet nominal GDP keeps shrinking. Assessing the development, the first thing that struck us as most unusual was that this sudden, sharp economic downturn occurred against the backdrop of most rampant money and credit growth. Total nonfederal, nonfinancial credit grew by $1,144.3 billion in 2000, after $1,102.6 billion in the year before. This compared with nominal GDP growth during the year by $437.2 billion. The first important conclusion to draw therefore was that this sudden economic downturn had obviously nothing to do with money or credit tightness.

Ever since, nonfinancial credit growth has sharply accelerated. In the fourth quarter of 2002, it hit a record of $1,612.8 billion, at annual rate, followed in the first quarter of 2003 by $1,338.3 billion. This coincided with simultaneous nominal growth of $388.4 billion and real GDP growth of $224.4 billion, both also at annual rate.   Assessing the development, the first thing that struck us as most unusual was that this sudden, sharp economic downturn occurred against the backdrop of most rampant money and credit growth. Total nonfederal, nonfinancial credit grew by $1,144.3 billion in 2000, after $1,102.6 billion in the year before. This compared with nominal GDP growth during the year by $437.2 billion. The first important conclusion to draw therefore was that this sudden economic downturn had obviously nothing to do with money or credit tightness.

Ever since, nonfinancial credit growth has sharply accelerated. In the fourth quarter of 2002, it hit a record of $1,612.8 billion, at annual rate, followed in the first quarter of 2003 by $1,338.3 billion. This coincided with simultaneous nominal growth of $388.4 billion and real GDP growth of $224.4 billion, both also at annual rate. For each dollar added to real GDP, there were thus six dollars added to the indebtedness of the nonfinancial sector.

What is most interesting is not that the statistics appear to be so bad, but that they are being intentionally distorted or under reported by the government agencies.  If it is not a conspiracy to defraud the public/win election, and a coverup to prevent it being perceived as such, then what it is?  Or, perhaps are we dealing with a desperate attempt at damage control, and panic prevention measures?   The 1-st possibility implies that gov is more corrupt than we thought, the second choice implies that economic situation is even worse than we thought.
Stan

StanInvest           Thu 18 Sep  2003  7PM
S-2-S
More hot air, more "successes"

More interesting data has appeared:
http://www.financialsense.com/fsu/editorials/2003/finger/0918.htm

Corporate debt, already at record levels, increased 1.4% in 2002 and at an average annual rate of 3.7% in the first quarter of 2003, to $4.9 trillion. That borrowing usually goes for productive things, like building factories and hiring workers. That’s not happening this time around: businesses continue to keep a lid on corporate spending by firing workers. Example: 93,000 layoffs in August, according to the unemployment report.

That is about 70 billion dollars of more corporate debt borrowed in 2002 and probably more than that this year.  Why exactly are businesses borrowing, if not for expansion (that they do not do), acquisitions (not this time) or capital equipment (not either)?  Could be perhaps to service the old debts?   Surely it cannot last forever, something has to happen...  When?

Another interesting article which I find really shocking, if it is true...

http://www.financialsense.com/stormwatch/oldupdates/2003/0912.htm

(I am saving this quote here for the reference to keep the numbers handy)

Quote:

"Defense Spending Pumped GDP

...According to official statistics, the U.S. economy grew at an annual rate of 3.1% during the second quarter and current consensus believes that we’ll hit 5% growth rates by the Q4. ... Defense spending during Q2 rose sharply during the quarter due to the war. It accounted for 55% or $40.6 billion of $73.5 billion in GDP growth. In other words, defense spending due to the war accounted for 1.53% of the 3.1% GDP growth rate.

Statistical Massaging

The other 1.32 percentage points of economic growth were mainly a statistical mirage. The remaining part of GDP growth was attributed to the statistical magic of hedonic indexing. Government statisticians turned a real increase of $6.3 billion in fixed investment in computers into a major increase in capex spending on computers of $38.4 billion with the flash of a statistical wand. Actual spending in current dollars rose from $76.3 billion to $82.6 billion during the quarter. Government statisticians turned a real increase in investment spending of $6.3 billion into a GDP number of $38.4 billion. The $38.4 billion was the number used to compute GDP growth—not the real number of $6.3 billion. The hypothetical increase in business spending of $32 billion did not exist in reality. Actual business spending on computers only increased by $6.3 billion—not by $38.4 billion as widely reported. This means that over 40% of GDP growth during the quarter was purely fictional. In a moment I will get to the implications of this number for the technology sector and the NASDAQ.

Kurt Richebächer has done a great job of tracking these statistical anomalies in his monthly newsletter, The Richebächer Letter. According to his recent newsletter, real economic growth during the second quarter was only $26 billion, a growth rate of 0.27% or 1.04 annualized.[1] That number is a far cry from the widely reported and revised 3.1% growth rates trumpeted by Wall Street and the financial press.

The statistical massaging doesn’t stop with hedonic indexing. The government can inflate the GDP numbers in other ways. For example, GDP is measured in dollars then the government subtracts the inflation numbers to arrive at real economic growth minus inflation. In the first quarter, the annualized inflation rate was 2.4%. Then in the second quarter, the inflation rate miraculously dropped to 0.8%. Does anybody really believe that the inflation rate dropped by two-thirds in one quarter?—a time when oil prices hovered above $30 a barrel for almost the entire quarter, a time when natural gas prices remained stubbornly above $4, when insurance premiums are jumping double digits, and food prices are escalating? By lowering the inflation rate, the government was able to make the GDP numbers look better. Remember, the inflation rate is subtracted from the GDP numbers. A higher inflation rate reduces GDP. Want a higher GDP number? Just lower the inflation rate. This kind of statistical tinkering made the jump in last November and December’s oil and gas prices come in as reduction in energy prices rather than an increase. This is the kind of statistical wizardry that is starting to make U.S. economic numbers as untrustworthy as corporate profits. The smart money doesn’t believe these numbers, nor should you."
_____________

StanInvest           Wed 10 Sep  2003  8PM
S-2-S
I thought it was an interesting discussion (I am saving it)!

Stanley P.  wrote:

  Yes, I did read it. It was news to me as well and I have come to the same conclusion: upward pressure on Au.I also agree
  about US crooks. The damage they did is enormous and the repair process did not start yet. See NYSE CEO pay package:  140 mln US plus 48 mln US he agreed to give back. this compares to 30 mln for all shareholders combined. These people will  not give their privileges easily (exactly like the communists). They will try anything to keep it. They will fail and the system will  purge itself of this cancer, but it will take years.My disagreament is about the policy about gold. I think It has no bearing on  the US$. ALL currencies would sink against gold. There is no conspiracy to keep the price low. It is an illogical conclusion.  There is nothing to gain.Besides, I think they are talking 32,000 tons at 10 mln U$/ton this makes 320 B$ grand total. In  todays economy this is peanuts!  About 3% of US GDP. About 10% of US tax revenue. Think about it. Sold or Not, It won't  make any difference to the economy.S.

I agree, at current gold prices, it is peanuts and won't make a dent.   But I suspect that American gov may be regarding it as a matter of principle and public relation exercize.   If gold suddenly doubled it would most likely undercut a  CONFIDENCE in the monetary system led by US dollar.  It would show the small investor that there exists an ALTERNATIVE to invest into, other than securities!   Do you recall how the communist system (and nazi too) were based on controlling people by removing ALTERNATIVES!      Think about it (remember our discussion about a shop with stale and useless products on dusty shelf that nobody really needs...).   Why did you really bought stock, in particular, not something else like paintings or archaeological artefacts or real estate?  The reason was obvious - there was NO OTHER SOUND ALTERNATIVE that would make sense, under the circumstances.   Probably 95% of the population (me included) would be in exactly the same situation.  My question:  why was there no alternative?
This is the key - not what but why!
Stan

Holly smoke.
 You are right, freedom is all about choice. Lincoln freed slaves and en masse they remained economic slaves for the next 100 years. You have to FIGHT for your freedom, political or economic. To do it first you have to FEEL you are a serf. Second you have to hate it. Third you have to do something about it.   We know NOW there were choices even under communism, albeit limited. You could own a hothouse, run a business, be a private ginecologist or run away. The good thing is we have MORE choices here. One, for example, is S & M Technologies. Another is a stock market. You are also free to move to New Zeeland or, with more trouble, USA. Bad news is that people are quite happy with the status quo.   I was always curious that a WW1 general in the back could order a suicidal attack agains fortified positions, kill 500,000 people in a week and get more VOLUNTEERS as replacements. In these four bloody years nobody has questionned the authority of the generals. Today CEO of NYSE (it is  a public company) earns 140 mln U$.   How about an experiment: sent him to Alaska and see what happens.    It won't be easy. Odds are agains us. Worse: you cannot really fight the system, you have to use it! A year ago I have grabbed the first step up -- and I let go.  [...]

StanInvest           Fri 5 Sep  2003  11AM
S-2-S
It does make sense!

Sept. 4, Bloomberg's news headline:

... Germany would sell gold in ``small steps,'' Finance Minister Hans Eichel said in a televised interview with Bloomberg News. Bundesbank President Ernst Welteke has said he wants the option of selling some of the central bank's gold when an accord limiting such sales comes up for review next year.

``The market came back from its rally'' because of Eichel's comments, said Steve List, a trader at Campbell & Co., which manages $5 billion in commodities funds.

It all makes perfect sense to me.  If I was in his shoes and wanted to sell a huge amount of something valuable, the most natural step is of course, to announce it in a televised interview a few weeks ahead of it, to guarantee the lowest possible price when that happens.   I don't think he is stupid, to the contrary - he will achieve his objective!    (I am not being cynical)
Stan

StanInvest           Tue 2 Sep  2003  11AM
S-2-S
It's really hard to believe...

Todays headline on Finance.Yahoo.com:

It's Hard to Believe
Tue 7:29am ET - SmartMoney.com
Forget stocks. Hard assets like precious metals and commodities are vastly underpriced.

That shows how carefull and skeptical one ought to be in listening to the media.  For example even only a few months ago when gold was 340 $/oz, or last year plus, when gold was around 300 $/oz, or 4 years back when it was 260 $/oz -  practically nobody would talk about it, except some fringe internet "gold bugs"!  In the mainstream media it was a non-issue.    Now, that gold is 370 $/oz it has suddenly become "underpriced"!

Stan

StanInvest           Thu 21 Aug  2003  1PM
S-2-S

I don't think so.  Not a totall collapse but probably a major forthcomming devaluation of the US$.  You are not stupid but just don't have the whole data (neither have I).   That's why I was bitching on the scarcity of good bulletins and websites.  Our mistake was that we looked at the economy through the American keyhole.  N.America is no longer 40% of the world business, its more like 20%.       "Economic Boom" - yes, it is already happening but in Asia - not here!

Increase in commodities prices (all of them not just metals) was long anticipated and the Asian boom will only fuel it up, and will not allow the prices to collapse much.  Regardless of the US$.  Weakenning or anticipation of this will further fuel the comodities prices especially when expressed in $.     The long period of cheap materials (including food) is over.    Good news for India, China, Argentina, Brazil, Canada, Australia and Russia.   This will make  labour component less important thus will dampen the current corporate trend of getting rid of the people.    It is also very good news for engineers and all creative professionals because it will make more important what do you do with all those expensive materials, rather than how do you deal & sell it.

US will also benefit, eventually, but first they will have to pass through a major correction, just like Japan but probably more severe.   Its real victims will be the financial sectors and all the paper tigers.
Stan

Stanley P.  wrote:

Inco przekroczylo $35 mimo strajku i wysokiego kursu CDN.Nikiel zbliza sie do 10,000. ATI przekroczyl $19.Ropa jest ponad 30 caly ten rok.Albo ja jestem totalny glupek albo to nie ma sensu.Takie ceny moze uzasadnic albo totalny kollaps wartosci dolara (inflacja) albo boom gospodarczy albo masywna manipulacja albo bezbrzezna glupota.

StanInvest           Wed  13 Aug  2003  1PM
S-2-S
What exactly is the relation between interest rates and inflation? (2)
...and what will happen if the interestrates will start going up from the current 1%

Please look at the last article (2 July  2003).   Currently accepted economical theory states that the rising interest rates ougt to
dampen inflation, therefore the standard response to rising inflation is to increase the interest rates.  If on the other hand my model is correct, then such a response will cause a run-away effect: the rising interest rates will fuel inflation and the rising inflation will in turn elicit further increases of the interest rates by the financial leaders.  The whole process will fuel each other with a very short time-frame (months) until the interest rates reach the equilibrium peak at around 6-8%, or may even overshot above that.

What will happen then?

My suspicion is that it will create a panic on the financial markets because of the fast time scale, and such a panic will lead to  investors fleeing the money markets into safer heavens, which may in turn destabilise the world currencies even further putting more inflationary pressure and forcing some governments to take drastic measures such as putting more friction into the system, blocking the transfer channels, protectionism etc.  All this is in principle highly inflationary.

This inflationary scenario will be triggered by some random impulse like in 1973 it was OPEC decission, this is hard to predict when it will happen, but once it happens the events will take place probably pretty fast.

That inflationary snap-up may potentially cause the following effects:

- Explosive rise in silver and gold prices to 660-5500$/oz (see article on 23  April  2003) as individual people will flee the paper investments especially bonds and cash.

- Long overdue big increases in commodity prices, which will also even out the global wage disparities between China, US etc.

- Bancruptcy of many of the most leveraged (indebted) corporations for example in the high tech, automotive, health and many other  sectors due to the explosively rising cost of credit.

- Chain bancruptcy of many banks and funds exposed to bancrupt corporations.

- Falling property prices world wide (in real terms) and  massive mortgage defaults in the US.

- Bancruptcy of many Real Estate Investment Trusts (REIT).

- Falling prices of corporate and government bonds world wide, and the resulting shortfall in the retirement funds world wide, forcing governments to intervene, putting pressure on the social welfare spending, causing more bond issue etc (another run-away effect!).

- Revival of the least leveraged (indebted) sectors such as manufacturing industry, agriculture, education, natural resources (water), small local decentralized entertainment, some small services and mining.

Stan

StanInvest           Sat  26 July  2003  5PM
S-2-S
Value analysis

Stanley P. wrote:

I have just discovered an answer. I'm pretty sure this is it.though none of the "journalists" mentioned it
yet.Quote:"JOHANNESBURG, July 24 (Reuters) - South African gold mine workers and mine owners failed
to reach agreement on pay demands in talks on Thursday, just three days before a threatened strike."
Comment: In 3 days 300,000 South African miners will go on strike. As far as gold price is concerned the sky is the limit.
I wish I have realized it a few days ago. It was a dead giveway and a great opportunity to make a quick buck.
S.

Stan B. wrote:

Quite likely!   I missed it too although there is very little I could have done since I am already invested in it.    The same
applies if the reverse happens, if gold goes suddenly back to 250$.      However, something is telling me that the gold price
might not go down by much when the strike ends.   This is a gut feeling and my tremendious trust in the abilities of all
governements to sustain the long term secular trend of making   currencies less and less valuable.
Stan

Stanley P. wrote:

Re: to sustain the long term secular trend...I totally agree. People love to spend money they don't have.
Especially if they can simply print them. They can even argue it is a good thing: to prevent deflation.
What worries me is demand. The biggest consumer, indian peasant stops buying when price goes over $350.
I noticed every year we have a "dip" in price right after the indian harvest as if "someone" was creating an opportunity for them to restock. Also, most of the indian demand is due to their stupid divorce law. They have a strong incentive to invent something different in order to put all these money to work. It may take a long time but it WILL happen. Absent the jewelry demand, the purely commercial price will probably revert to historical gold/silver price ratio, and the supply would exceed purely commercial demand by a wide margin. As you noticed this is "value" analysis.Will see. have a nice trip.
S.

Value analysis is very useful except when it does not work.

As with most value analysis, at the bottom of it is a judgement call.   If you assume that whenever gold gets above 350$ then no other buyer would materialize, and Indians will suddenly stop buying, then the price will of course never exceed 350 by much.

However, gold is bought mainly as an investment, by Indians and all.  All this jewelry is just a pretext.  They do not buy their wives gold only to look nice. If that was the only purpose, a gold plated brass would look just as good. They buy it as an investment, therefore the usual talking about supply and demand does not apply in the usual sense, not the same way as for example in case of gasoline or stainless steel.   Namely, if some investment is getting more and more valuable then people do not normally buy less and less, but often to the contrary - more and more of it.  Such is the nature of speculative bubbles.   Such was the case with dot com shares and property bubbles.     Our Irish friend declined once an offer from the ministery of forrestry to buy a perfectly good house in Ireland for 100 Irish Pounds in 1963.    Nobody wanted it.    Total market for gold is worth 90B$, for silver about 50B$. Market for stock is worth trillions.  Even if single percentages get diverted, the stock won't notice while gold may double!  It seems to me, the situation is extremely unstable.

5 years ago you had gold for only 260$/oz, were Indians buying then gold like crazy? - No they weren't!  So here you have an answer to this theory.

Like with all bubbles, gold and silver will probably be explosive, it may start from even a small trigger, for example Chinese suddenly buying lots of silver, and silver then pulling gold  up (I do not believe that gold will pull siver, i think this time it will be the other way around).   On top of this when gold will really start appreciating in Euros (so far it hasn't!), then you will have half a billion Europeans putting their speculative money in it.  Note that in Europe there is at the moment nothing else to speculate on, except horse races.  The stock is flat like a pancake or falling, and property has completely fizzled out, you can buy now reasonable holliday houses in France and UK for 20000eu, while in Germany property prices are much higher but totally stagnant and roughly the same in nominal numbers as 30 years ago.   Their bank accounts are paying 1.5% on deposits, while consumer inflation is in some countries close to  4%.  Bonds & certificates are as dead as here.   What else have they got?  Growth stock that doesn't grow ??, besides after Marconi, Ahold, Vivendi and telecoms fiasco, which had a bigger impact over there than dotcoms here,  - people do not trust their savings to corporate stock.

There are only following choices for investments and for speculation:

Goup (a) - highly volatile
- corporate stock
- mutual funds
- real estate

Group (b) - least volatile, low yield
- cash accounts
- corporate bonds
- government bonds

Group (c) - volatile cyclical
- commodities futures
- antiques, works of art and collectibles
- gold and silver   (NOT all precious metals!)

(I hope I haven't missed something)
Take your pick.  As it happens, in the last 3 years we have just passed the peaks of the bubbles in  (a), while group (b) is stagnant.    Group (c) have had the last peak 20 years ago and has been falling ever since, until recently

Based on the roughly estimated duration of cycles (10-30 years) it is probably much more likely to see a growth cycle in (c) sooner rather then in groups (a) or (b).

Note I won't give you a guarantie - this is a "legal" disclaimer, in case Nortel Notworks and the likes go back to 100$    8-:)
My dad used to say that you can always predict future events with exactly 50% probability:   it will either happen or not...

Stan

StanInvest           Thu  17 July  2003  2PM
S-2-S
Good solid blue-chip businesses...

GM Earnings Plummet 30%

Nearly all of GM's second-quarter earnings came from its finance unit, General Motors Acceptance Corp. (GMAC), which earned a record profit of $834 million in the period, up from $431 million a year earlier. GMAC's mortgage operations, which benefited from low interest rates, earned $415 million.

GM rival Ford Motor Co. (NYSE:F - News) also said most of its second-quarter earnings came from its captive finance unit. On Wednesday the world's No. 2 automaker reported earnings of $417 million, down 27 percent from a year earlier. Its automotive operations earned just $3 million before taxes.

This is GE syndrome, and no word whatsoever about their pension liabilities!   They are financing customers to buy cars with loans and mortgages, and they still cannot make a profit!      I have a feeling that the time has come for the banking sector, including pseudo-banks such as above, to feel the crunch.   This is based on the gut feeling and on the first principles.    I have a feeling that they have had it too good for too long and obviously, somebody will have to bear the costs of the failed 1990-ties investments.   It won't be all passed onto those poor retirees and their already decimated savings, there is a limit to what extent they can be #@$.   Eventually it will have to come back to the entities that have undersigned all those investments, loans and bonds.

Stan

StanInvest           Wed  2 July  2003  12PM
S-2-S
What exactly is the relation between interest rates and inflation?

    Simple question and obvious answer?  - Wrong!    I just realized, while reading this article: FSO Editorials The Bubble That Broke The World by Antal E.Fekete  06-27-2003   that the model is in fact non-linear while most economists seem to be using a linear relation.

The reason it is so is that consumer price (P) inflation is the result of imbalance betwee circulating cash (CA) plus consumer credit (CR), and the amount of goods (G) plus services (S).

    P = (CA + CR)/(G + S)

where P is the average price of a hypothetical basket of all goods and services
Since CR constitutes now about 3 times as much as CA therefore, while G and S are constant or slowly warying in time, CA is increasing rather slowly, therefore P is influenced mostly by fluctuations CR.

Therefore rapid expansion of CR causes rapid increases in P, while contraction of CR decreases it.

What does CR depends on?
    - Supply of credit
    - Demand for credit
    - Existence of financial infrastructure

CR can increase if the supply of CR increases, that is if banks and other lenders are more willing to take more risks and lend more, and also if the demand for loans increases, that is if borrowers are more willing to take more risks and borrow more.  Conversly, CR will not change if the increase in CR supply is counteracted by the reduction in demand, or if an increase in demand is not met by an increase in supply.

CR demand depends on economic situation, i.e. recessionary reduces it, booming economy increases it, and also on the lending rates which relates to our famous INTEREST RATES.

CR supply does depends to some extent on the recession/boom cycle but not as much as borrowers' demand , since lenders have their own way of managing the risk which cussions them from boom-to-bust cycle to some extent.    However - CR supply depends strongly on the ratio between the interest rates and the investment risk.  If the interest rates are low then lenders tend to seek out less risky investments, and vice versa.   As anyone who ever wanted to take out a business loan must have found out...

The overall result is that the supply of CR diminishes in the economy when the interest rates are very low because lenders have less incentive to lend to an average business or consumer, given that the risks are moreless constant.    CR demand on the other hand diminishes when the interest rates are very high since borrowers would have to bear much higher repayment costs and risk.    This creates a situation when CR is the highest when BOTH supply and demand are reasonably strong which happens when the interest rates are neither too low nor too high but in-between.

This brings immediately the following conclusion: both very high interest rates and very low or negative interest rates can be deflationary!

Optimal interest rates (IR) are probably 6-7% for consumers, and 7-9% for businesses, based on the past experience, as illustrated on the following graph:

It should be possible to develop a more elaborate model, for example, CR may be represented as being proportional to supply and demand, where supply may be quantified as proportional to IR-to-risk ratio, risk (R) may be quantified as probability of default per year, demand may be estimated as inverse to interest rates and proportional to a recession-dependent confidence factor (CF) which in turn can be modelled as inversely proportional to risk R, etc.

Spreadsheet Model of CR vs IR

Stan

StanInvest           Thu 26  June  2003  12AM
S-2-S
Prophetic words came true - "The next few months will be interesting"

    Technical analysis is fascinating even if it does not work, or perhaps especially more so, since we tend to learn more out of failures then out of successes.  It is always a good idea to test-fly the thing.  Here is a result of a market prediction that I have followed and tested in the last couple of months.   The following two graphs courtesy  http://www.financialsense.com/metals/xau.htm  are self-explanatory and do not need comments.  A conclusion regarding Elliott's wave seems also obvious, see also my previous test of last year...

StanInvest           Mon 16  June  2003  11PM
S-2-S
Miracle of a sudden increase in gold production costs explained - or nothing is what you see.

http://www.kitco.com/ind/Murphy/jun162003.html
.
Barrick's drop in earnings is a result of the new accounting rules that required that derivatives be attached to the operations that they hedge and because of Barrick's accounting selection which requires that the losses from derivative hedges be applied to the project they are hedging and be realized in the quarter in which they occurred. As gold turned against Barrick hedges, Barrick chose not to be totally truthful but to via spin city talk attribute the loses to each project saying the economics, of say, the Bulyanhulu project had turned bad and therefore Bulyanhulu had not performed well resulting in lower profits. People assumed ABX was speaking about something had gone wrong with the mining economics of the Bulyanhulu when this was not true. The absolute truth was the mine economics performed perfectly but the hedge cost Bulyanhulu's bottom line. Management was predicting good earning based on the true operating results then came the blow from the costly hedges resulting in lower profits. Barrick spin city talked, saying it was a shift in the economics of 12 of their projects all at once. It was not. It was the hedges losing money being applied to the projects that hurt their economics. This is proven by the comments in the last annual statement for instance concerning the mine economics of the Bulyanhulu that has functioned perfectly. Lawyer talking which spin city talking is so closely approximates lying actually to your shareholders always get you in deep trouble. When gold was dropping sharply in the long Bull market ABX had no problem telling the world all the money they made on the hedges short [position of gold as they helped gold go lower orally and by their trading. Now that gold is going up and their hedges are costing them money the spin city talk to keep the focus off their now losing gold commodity trading operations they call hedging.
This suit is a product of that spin city talk to stockholders rather than admitting that the damn hedging is killing you.

This proves that the common sense and sticking to the long term data works.  If the cost of gold production 5 years ago was for example 150$/oz and now is approaching 300$ then it is probably the 5 years old figure that is correct and the most recent one is a fiddle.
Another technique is probably to use a long term average.   This shows that it is probably harder to dig the thruth out of the fin audits than gold...

Stan

StanInvest           Fri 16  May  2003  11AM
S-2-S
Risk-aversion and recessions.

I have an impression that Caroline Baum of Bloomberg has just answered our question.  Have a look:

http://quote.bloomberg.com/apps/news?pid=10000039&sid=acGuK4KKx8sM&refer=columnist_baum

Assurances from the Fed, implied rather than stated, that short-term rates aren't going up soon -- even if economic growth accelerates -- encouraged investors to buy long-term Treasuries. The Fed, in other words, gave its blessing to the ``carry trade,'' or financing the purchase of long-term securities with short-term borrowing. It's that kind of leverage that got the bond market into trouble in 1994 when short-term rates started to rise.

That means, if I am interpreting it correctly, that there is a very large rush to use the short term credit to buy long term fixed income securities such as tbonds (and probably also local state securities and big corp bonds).    Since the short term credit market is directly influencing consumer credit and cash situation, it may explain the paradox of consumer price deflation.  Another contributory factor  may be the depth of the recession and the (cultural) trend to undercut salaries and reduce employment.     It is still difficult to understand what came first, that is the causual link.
Perhaps the linkage is as follows

1.  Asset inflation (stock bubble 1995-2000) and growth in long term debt as evidenced by the non-inflationary growth of overall credit supply by about 1T$/yr.  That growth = supply of investment credit caused interest rate to decline.

2.  Stock crash (2000) making the stock assets and the long term debt highly illiquid.

3.  Industrial recession eased pressure to raise interest rates, interest rates stay low.

4. Corporations are using short term credit facilities to service their long term debt.  It drains short term credit and cash out of the consumer market.

5.  Gov and corporations are borrowing more long term while the interest rates stay favorable for borrowers. It further drains short term credit and cash out of the consumer market.

6.  Consumer market becomes deflationary, that is declining cash circulation causes prices to fall which reinforces the low interest rates scenario.

7. Low interest environment encourages risk-aversion, since even a small risk of default would wipe out a paltry 4%/yr gain.  This further increases the credit flow towards the big corporate entities and governments that are perceived as more stable and less risky then smaller companies.   This is a classical 19-th century prolongued deflationary self-perpetuating recession scenario, so much feared.  Deflationary - even in spite of expanding credit supply because of the illiquidity.   Since it favors big entities, it reinforces recessionary situation.  In fact one can argue that any system that favors big economical entities must be recessionary, because it is the small entities that always create most of the employment, are most innovative  and pull us out of recessions each time.

Perhaps the key to understanding the situation is the concentration of resources in the hands of big entities, which seems to be always recessionary.  Whether it is accompanied by consumer price deflation (as in the West now, or Japan) or by inflation (as in the 1970-ties West,  1980-ties Eastern Europe or Latin America) is probably secondary and depends on the particular financial infrastructure.   For the recession to end, big entities must start declining and small businesses must be growing, whatever way it takes to accomplish it.

Stan

StanInvest           Thu 15  May  2003  4PM
S-2-S

Czesc Stas.
Robi sie coraz ciekawiej. PPI (producer price index, measurement of manufacturing/materials inflation) in april was down (-1.9%),
or down (-0.9%) ex fuel,auto This means we have a deflation, at least temporarily. At the same time gold, stocks and bonds are all up which does not make sense unless the US$ is debasing which spells inflation. I have no idea what is going on.    S

I don't understand it either.    I have a suspicion that we indeed are experiencing consumer price deflation (in average) coexistng with massivly overinflated investment credit supply overhang from the past, which is frozen out of the circulation due to the meltdown of collateral assets (=stock) and the unwillingness of participants to rectify their scores through deserved insolvencies.  That means probably that the industrial investment credit market must have decoupled itself from the consumer goods market that uses cash and personal credit.   That is Nortel Notworks  and Hot Air Canada may still hold illiquid assets that they cannot sell but nominally have some value.  They themselves constitute illiquid assets for someone else (e.g. banks and investors).   At the same time they have relatively minute reserves of the real cash and the short term credit which is much smaller than their nominal assets and debt.   For some reason the monetary supply of the first group (real consumer cash and short term credit) must be shrinking rapidly creating consumer price deflation while the excessive investment monetary supply has inflated the assets prices (e.g. in terms of P/E).  We can speculate what that reason is, but my suspicion is that this consumer cash and short term credit are siphoned out of the market by some very large players, may be even are going abroad.    I don't know why.   This is especially strange that until now, industrial development credit overexpansion always used to lead to consumer monatary supply expansion and general inflation in the past.   Another possiblity is that the large corporations may be accumulating cash and short term credit  for the putpose of repairing their liquidity to stave off the meltdown, thus may be starving the consumer market of cash.   On the other hand gold belongs to the investor's market more then to consumer, therefore it is undergoing price inflation like the stock assets (or competeing with stock for the same funds).    This is very complicated.   What do you think the reasons are?
Stan

StanInvest           Sat 10  May  2003  3PM
S-2-S

You will like this story.   Some analysts recommend this stock on the ground that the bad news has depressed it below the true "value".  I have a slightly different perspective on that, as you know:  first, the health system charging fees structure is untennable and their biggest customers - the elderly have to live on fixed-income rents - 4% r.o.i. !!!     Secondly,  many people are finding out how to be healthy without them (Atkins is just a tip of the iceberg),  thus the demand for the health biz services has very likely to have peaked out already.   Double whammy - their pricing power is shot because elderly are getting relatively poorer, and the volume is likely to go down because the alternative to being sick,  that is being healthy - is getting more and more attractive as the time goes by.

http://biz.yahoo.com/ap/030508/healthsouth_6.html

...
In addition to 31 bank and brokerage accounts, Scrushy has four mansions, a 92-foot yacht and 10 other boats, 34 automobiles and two airplanes, testimony showed. "It would not be just if Scrushy is allowed to continue to live the lifestyle of the rich and famous when every dollar he spends is going to be one dollar less for the victims," Hicks said in closing arguments. Attorneys for Scrushy, however, asked the judge to unfreeze all his assets, or, as an alternative, at least $49 million in an account the defense said wasn't linked to the fraud claims. The SEC sued HealthSouth and Scrushy in March accusing him of orchestrating a massive accounting fraud. Scrushy's attorneys have said they expect him to be indicted. Scrushy, according to the SEC, directed employees to overstate the company's earnings to make it appear HealthSouth was meeting the earnings forecasts of Wall Street analysts. Scrushy earned bonuses and sold stock worth $175 million based on faked numbers, the government contends.
...

Stanley P.  wrote:

For the record.I have no problem paying for good research.How you separate good research from Meekers, Blodgets and
  Goodmans? How do you know what to buy.  Buffett is not writing newsletters

Re: Buffett.

I do not consider Buffett a typical investor, he ceased to be one 30 years ago after he made his first billion.   I have a
tremendious respect for him as an industrialist, The Sage and a Businessman  Who Is Not Afraid To Speak, but it is not the same as investing in the classical sense.  He buys companies out and runs them.  He is a fixer.   His principles of value investing that he likes talking about, worked very well 30 years ago when you could buy companies for less than they were worth, while P/E was hovering between 5 and 15 (average) and were paying you 4% dividends on top of that.   Now you can't!  Except companies that are terminally cheap, are called Phillip-Morris,  or have their books cooked, all the rest seem to give you a paltry P/E=20-40 (mostly some dubious pro-forma figures!) with a probability of defaulting of around 30%/10y (my estimate based on 1970-ties "Nifty-Fifty" parallel).   How would you select a value between one overpriced company and another ?   No way.  You have to either go for growth - not value, wait for a better time, or play some short term gambles on day trading.

Re:  which analyst, which newsletter

Good question.  The only way I believe is to try them out.  I have subscribed provisionally to WallStreetCity,  Carlson Advice for Investors.  They are cheap and quite poor in contents.  I also bought 2 books.  I am not afraid of being stuck with another Mary Meeker, "Buy Now" Grubman or Henry "The Strong Buy" Blodget.  They did not have any influence upon me back in 1999 so it is unlikely that I would fall for such traps in the future.   I never bought a single dot com share ever!   I only bought one telecom stock (ADCT) in 2001 for 250$, sold it 6m later for 120$.  That's was it!     I generally tend to be too cautious that is why I buy mostly that stuff you know what.   My plan is to subscribe to a few more sites, try them out and cancel all but one ofter a couple of months.   I was thinking of trying Prospector Assets Management but seems pricey and limited to the glittering stuff only, I might try them out later, or if we could split the costs perhaps?    Na razie,

Stan

StanInvest           Wed 7  May  2003  5PM
S-2-S
Gaping Liabilities

Bloomberg, Mysak's article

Buffett's comments this past weekend are especially relevant now because a record 79 percent of U.S. public pension plans are underfunded, according to Wilshire Associates Inc. of Santa Monica, California.

It appears to be more serious than I thought.  Let's do some maths.   1.5 millions of public employees  times average 400000$ pension investment per head makes 600 B$ total.   One can calculate it the other way: the state of IL and  NJ need to raise 10B$ each this year.  If each of the remaining states needed as much, in average - that would make it 500B$.     It is paramount that the stock market MUST NOT drop any further, or these liabilities may overwhelm the state finances and may create a general pension melt-down in the private sector as well.    This may explain perhaps a lot of what is happening.

StanInvest           Tue 6  May  2003  10AM
S-2-S

http://quote.bloomberg.com/apps/news?pid=10000082&sid=aIeEKc4hXX5A&refer=canada

Canada Sold 85,703 Ounces of Gold in April, 18% of Holdings
By Greg Quinn Ottawa, May 5 (Bloomberg)
-- Canada sold 18 percent of its gold holdings last month as part of a longstanding plan to improve returns on its international reserves. ...

They sold 85703 oz in April, plus 90,588oz in February.    It is amazing that, in spite of that gold price did not go down below 320$ at the bottom!    This is exactly the re-run of the late 1960-ties / early 1970-ties when for years governments were selling gold like lunatics for 40$/oz only to see it skyrocket beyond 120$ in the mid 1970-ties!     I must digress here.  There is a famous story involving sale of the so-called Lateran Gold by Vatican in the 1970-ty or around.   The Pope (Paul VI) decided to do it for ideological reasons (gold is supposed to be "bad"...) and sold all the gold given to Vatican by Mussolini in 1920-ties as a compensation for annexation all the Vatican state property in Italy.    He sold it for peanuts at the 1960-ties official prices, only to see it skyrocket a year later or so.  In addition as it turns out, the sale was engineered through Pope's buddies in the Banco Ambrosiano who made a fortune.   Several people involved with this transactions died mysteriously, were killed or arrested (the whole thing was a real mess because it also involved mafia and Italian masonic organisation).   May be the Pope was right - gold was bad - for him!

   This is pure physics - nobody can reverse the long term trends.  By trying to stabilize the price against the trend, they will only achieve a sudden price correction when the time comes.  Rather than much less damaging slow creapage if they did not rush into mad selling.   Interventionism is a disease...

Stan

StanInvest           Mon 5  May  2003  7PM
S-2-S

Economy seems to be not only about magnificent cities and great furnaces of Magnitogorsk but rather about a fine balance between the currency and creadit turnover.  If those are overstretched and the value of paper assets artificially exaggerated, these assets will have to contract, in relation to the amount of currency in circulation, regardless of the physical amount of infrastructure.  Germany during Weimar Republic were totally broke and insolvent, yet their total industrial capacity was intact and higher than that of Great Britain or France.

Gold is one of the safer assets for people who want to move their savings from an unstable currency to something more stable.   That is why Buffett buys companies not just shares.   These hard assets will have to go up as the value of paper assets in the form of company shares with P/E=30-50, debt-to-equity ratios of 3 or higher, and their debt bonds, mortgages held by people who have no jobs etc, will have to go down.   I am very optimistic and positive that this will have to happen, sooner rather than later.   As for gold price, my back-of-the-envelope estimate of min to max of 660-5500$/oz should hold - although I can't predict how quickly it will be rising.

I have no idea whether C$ has a limit of 0.8 or 1.2 US$.  Time will tell.  I would not be surprised either way.
So far comodities and gold are rising more less in tune with the deterioration of US$, so nothing is really changing for Canadians.  Deterioration of hi-tech employment is also reducing pressure on wages in the other sectors, which is good for those other sectors...

One major factor however, is the development of SARS and the effect it is having on the Chinese economy.   It has exposed its real weakness and that is the corrupt and ineffective government.   USA may indeed emerge as the strongest guy on the playing field after all, after the inflation settles down.   That would be good news for us.

Stan

Stanley P.  wrote:

Don't hold your breath for C$. I still think you overestimate the weaknes in US$ and strenght of everything else, gold including. C$ and Euro are interest rate plays. There is no merit in strength of C$. In fact, Canadian metals & minerals, pulp & paper and autos will get crushed in Q2. Imagine: C$ was 0.61 not long ago, it is .705 now. Since the price of commodities is in US$ and the market is in the US the top line (revenue) of canadian exporters will shrink 15% in canadian dollars while they cost stay the same. Imagine what it will do to the bottom line. US is not all smoke and mirrors, though it surely looks like it. Since this is a "theme" for the next few quarters we'll surely discuss it again.To focus our thinking: I think CAD will go to $.75 and stop.I do not think it will reach $.80 let alone parity any time soon. This is just my opinion. I also think gold will trade in range 330-350 avg 340 for the next year, unless we have a North Korean blowup (like successfull nuke testing).Stan

StanInvest           Fri 2  May  2003  4PM
S-2-S

Mass amnesia

Small investors are probably getting sucked-in on false jiggles created by large fast transactions engineered through tbond-to-stock-and-back transfers.   These transactions involve only minor losses through friction.  In my  previous estimate if it takes 1-4G$ to moves a stock by 2% in an hour, therefore the round-trip losses are probably of the order of:  (1%commission+2%stockloss)*4G$ = 30-120M$.
At the same time, assumming for the sake of discussion, that the small investors have poured 10 times as much cash in, over a few days, the stock exchange may have made back on commissions what they have lost on engineering the original jiggle.   If it was them.   At the same time some very big players may have an opportunity to dump their stock slowly onto a slightly  rising market.    I would have probably done the same thing if I had any high-tech shares left.

Re: airlines

That is truly amazing!   Everything is going against them.  Not only the short term travel freeze (it is not just terrorism but also recession and SARS!) is against them, but also the long-term sector fundamentals really suck!   We were talking this already in the context of Hotair Canada.   Yet they all rise on the news of the biggest ever losses!   Airlines may very soon cost investors more money that the entire dotcom scam!

Stan

Stanley P.  wrote:

Hi Stan

Re: Who is capable of mobilizing cash to buy stock over the last months
without having to sell tbonds?

These were fresh money from small investors. For some reason they are buying
again. They are probably afraid to miss the "next great rally"

Stan

StanInvest           Thu 1  May  2003  7PM
S-2-S

This is important:

From www.f---edcompany.com:

Like the Kosher symbol -- for calculators
Mass layoffs and money-losing at Underwriters Laboratory --
that little "UL" logo that's on the bottom of all your electronics --
according to this internal memo.
 [ http://www.internalmemos.com/memos/memodetails.php?memo_id=1529 ]
When: 4/30/2003
Company: Underwriter Laboratories, Inc.
Severity: 50
Points: 150
290 comments in the Happy Fun Slander Corner!

That memo says:

Underwriters Laboratory
Staff Reductions and Revenue Cuts

To West Coast Division Employees:
So far this year, the economic situation has been worse than expected and
revenue generated by new work in the West Coast Division has been
considerably less than we planned. From January on, the division has lost
more than $300,000 per month. Unfortunately, there do not seem to be clear
indications that the economy will rebound soon enough and strong enough for
us to make up this loss in 2003 through new business.
...

That is probably the best proof I have ever seen, on the state of the high-tech industry. There is absolutely zero chances of recovery in 2003 and 1-st half of 2004 because for new products it takes about 6-12 months from the beginning of UL approvals process to launch on the market.  No new products = no hitech recovery.  It is as simple as that.

Stan

------

Stan P. wrote:

You may have bee right after all:"The traditional view is stocks go up and bonds sell off -- and that has not happened," said Subodh Kumar, chief investment strategist at CIBC World Markets.   This tells us that instead of money flowing out of bonds into stocks, it's cash going into stocks. That's the money on the sidelines that was parked by investors."

It happened on 28 and 29-th of April within a time scale of 1h (between 9 and 11AM).  Stock went simultaneously up and bonds went down (=yields went up).  This did look like a normal investor's reaction, albeit very large and fast one, may be even the government - dumping bonds or issuing more bonds, and using preceeds to buy stock.

However, Kumar refers probably to the last 3 weeks (since 10-th of April) when the daily-averaged 10y tbonds marginally up or flat (=yields were unchanged) while the stock market went up.  That is abnormal!   It does look like there is some longer term lack of interest in selling or buying bonds, while all the long term activity takes place on the stock market!   Who is capable of mobilizing cash to buy stock over the last months without having to sell tbonds?   Probably not the US government, unless I am missing something.   It could be individual small investors who usually play cash (the sucking sound theory...).  It could also be the foreigners.     Hmm

StanInvest           Tue 29  April  2003  2PM
S-2-S
More Conspiracy ...

Re: I think it explains this bear market rally,

No it doesn't.  Somebody bought yesterday between 9-11AM massive amount of stock, sold bonds and shorted gold.  No single company could have done that.  Since you have about 3e9 shares traded per day, that is a turnover of the order of 600 billion US$ a day, or 100billion $  per hour.  To skew the price levels by 2% within an hour, you  would probably need to trade extra about 1-4 billion $ worth of securities in a coherent fashion, within an hour or so.   No sane broker or investment bank would trade publicly such a large amount in such a short time since this is equivalent to "pissing on your own shoes" so to speak.   In other words this is a receipe of paying extra a so-called panic bying premium.  Even when brokers trade much smaller sums they would do it over several days, typically, at random time, to avoid creating ripples.

The only explanation I can see, is that somebody was prepared to lose some money and was more interested in creating ripples rather then avoiding them.

BTW - A similar action was staged also today, also betwen 9-11AM, on a slightly smaller scale.
I agree with you that the market cannot be manipulated for a very long time against the fundamentals.  That is why I am concerned.   I am convinced that this "somebody" is doing it in good faith to help stabilize the market but I do not believe they will succeed, and the outcome will be likely worse then if they didn't try.  I do not believe in interventionism.  That's why I am concerned.
Stan

Stanley P.  wrote:

Have you seen the last "prosopector Asset Management" bulletin at Kitco. It conforms to your gold price theory.Personally, I am not convinced.Co do cudow: consumer confidence index is up. SARS worries are easing up. US brokerages settled Blodget/Meaker/Grubman fiasco. They need 1.4 billion in cash to pay. I think it explains this bear market rally, shortlived as it may be. Please note: all commodities are down, including AL, Ni, Cu. Nobody expect surge in productionS

StanInvest           Mon 28  April  2003  5PM
S-2-S
More Conspiracy or Economic Miracle (Tzw "Cuda i Dziwy")

What happened between 9 and 11 AM ???
Somebody sold tons of bonds, shorted gold and bought tons of stock, all at  the same time!
I am getting worried.  Something is comming.
Stan

Sources:
http://finance.yahoo.com/
http://www.kitco.com

StanInvest           Sun  27  April  2003  10PM
S-2-S

Conspiracy   <--- click on this

You need an mp3 player to play this 6 minute fragment.  The host (Jim Puplava) reads an email from one of Wall Street top 3 brokerage manager.

The full program is at:
http://www.netcastdaily.com/fsnewshour.htm
http://www.netcastdaily.com/1complete/fsn042603-1.ram

StanInvest           Wed  23  April  2003  1PM
S-2-S
What if currencies returned to gold backing?

James Turk's article  http://www.kitco.com/ind/Turk/apr222003.html

provides interesting data allowing some back-of-the-envelope calculations:

Total  quantity of national currency =  $30 trillion,
Total amount of gold held in central banks' vaults =  17,291 tonnes
Total amount of gold above-ground = 17,291/0.119 = 145294 tonnes

Now, assuming that currencies go back to gold backing in the similar ratio as in 1911 (about 10%), using only gold in posession by the central banks, gives the estimate of gold price = 5500 US$/oz
If we use the total above-ground amount of gold, this becomes 660 US$/oz
Fascinating...
Stan

StanInvest           Wed  17  April  2003  10PM
S-2-S
Subject:  risk & security sharing

http://biz.yahoo.com/rb/030417/airlines_american_unions_2.html

Reuters -   American Air Unions Upset at Pension Fund
Thursday April 17, 7:17 pm ET
By Jon Herskovitz

Two other major unions also expressed outrage at news of special pension funding for senior management, just as rank-and-file workers agreed to stiff pay cuts.   Jim Little, a senior member of the Transport Workers Union, berated a plan to provide funds for a pension trust that would pay top executives a portion of their pensions in the event of bankruptcy. He said unions were informed of the plan through a Securities and Exchange Commission (News - Websites) filing made as rank and file members were concluding the vote on the concession deals.

Management shares the security, employees share the risk.

StanInvest           Wed  17  April  2003  6PM
S-2-S
Subject: dr. Atkins died

Atkins - Alone Against All.
Brilliant man and not afraid to go against the establishment; very rare treat in the culture where a fake "pretend-to-be-a-team-player" seems to be the accepted conduct. I found him to be a great scholar as well. He wanted to eradicate diabetes. His books are very well researched and full of source references to the most reputable research studies, as wel as based on his own practice. I am grateful for his work. RIP
Heretic

(reposted from WebMD)

StanInvest           Wed  16  April  2003  8PM

S-2-S

Subject: Ford

http://biz.yahoo.com/rb/030416/autos_ford_earns_16.html

Ford said it earned $896 million in the first quarter, or 45 cents a share, more than double the average analysts' forecast of 22 cents a share. It also beat the company's own estimate of 20 cents a share. Ford lost $1.1 billion or 61 cents a share in the first quarter of 2002.  Some analysts had already assumed Ford would outperform its low expectations after credit rating agency Standard & Poor's affirmed its stance on Ford last week. S&P said the automaker was on track with its cost-cutting and its goal of break-even pretax earnings in its automotive unit.
...
Ford Credit, Ford's financing arm, earned $442 million in the quarter, up 72 percent from a year ago. Gilmour cited higher whole-loan sales and securitizations of vehicle loans.

It looks like firing employees does pay off.    In addition, giving customers credit to buy the vehicles produces double benefit -
#1.  It helps selling the cars.
#2.  It makes profit for the financial division that may even equal to the profit generated by the entire car making operation.

Smartass comments:

Something is telling me that Ford borrows lots of money then keeps shifting it from one pocket to another and clocking some profit each time.
It means that their current operation is financed really by the borrowed cash, while the repayments may hapen over time (or never).
The real fun begins when some of their customers would stop repayments, and when the cost of carrying the credit burden becomes significant to their banking division.    Regular banks have the way of dealing with such events, Ford might not.   I find it strange that the automotive company thinks more about cutting costs and imitating a bank, rather than improving their products.  At a time of recession or a slow down, the product quality is paramount.  The last recession of early 1980-ties has launched the likes of Datsun-Nissan, Toyota and Honda while the Big Three slept through it.   It looks like this time it will probably be the same plus other Asians included.    Other car companies can easily learn how to do pull out that 0% financing trick (=add interest to the vehicle base price) and Ford advantage would disappear overnight.   Big companies never seem to learn anything.

Stan

StanInvest           Sat  29  March  2003  5PM

Stan to Stan

Today's recommended reading:

Marc Faber    "The Next Big Thing"

http://www.financialsense.com/transcriptions/Faber.htm

I am also including here your yesterday's post with that Bloomberg article for the reference.  Very interesting.   Looks like we may be dealing here with the industry-wide  cultural crisis, not just economic recession.    A few years ago I though it was only company M. while my friends thought it was all in my head or I was just,  quote - "prejudiced against management".  Obviously, corruption is nothing new, however - it looks like for the second time in history (first time was in the Eastern block) it happened on such a wide scale and thus may have such a deep implication, possibly reducing the entire high technology publicly owned industry into a collection of boarded-up warehouses.    The "nortelisation"  of the industry.   It reminds me, on my last trip I had an opportunity to admire a new magnificent Lucent building, massive structure must be about 500m long - with just a handful of cars parked at front of it!

Stan

------------------------------------------------------------------------------------------------
Subject:           BN
   Date:            Fri, 28 Mar 2003 13:56:23 -0500
   From:          "Stanley P.     To:             stanb at ptbo.igs.net

Czesc. Znalazlem ciekawy artykul. Nie bede komentowal, bo wszystko jest jasne.
Co jest ciekawe to pogarda autora dla tych ludzi.
S

Delta CEO Gets Pay Raise of 120%

Commentary. Graef Crystal is a columnist for
Bloomberg News. The opinions expressed are his own.

By Graef Crystal

Las Vegas, March 28 (Bloomberg) -- The board compensation committee of Delta Air Lines Inc. is badly in need of a collective eye exam.

In return for delivering a 58 percent shareholder return for the year ended Dec. 31, 2002, the committee, consisting of one current chief executive officer and three retired CEOs of major companies, handed CEO Leo Mullin a pay raise of 120 percent. The only problem is the committee didn't notice the tiny minus sign in front of the 58 percent figure.  Mullin's huge raise in the face of stunningly poor performance sends all the wrong signals to Congress, shareholders and employees.  At a time when the airline industry is rattling its tin cup for more Federal aid, a raise of this magnitude won't help the industry's cause. The  raise Mullin received would seem to suggest that Delta, at least, has plenty of extra money lying around.   Right after 9/11, Congress enacted the Air Transportation Safety and System Stabilization Act. It contains a provision that prohibits an airline that asked the government for loan guarantees and subsequently received them from increasing senior executive pay over that received in 2000 until two years following 9/11, or, effectively, 2004.

Cash Bailout

According to Delta spokesman John Kennedy, ``Delta did not apply for, therefore did not accept, any federal loan guarantees.'' Thus, the company is exempt from the act's pay cap. But it did participate in the $5 billion cash bailout of the industry.  Still, what Congress did back in 2001 suggests that the legislators will demand a quid pro quo between assisting the airlines financially a  second time and curbing senior executive pay. What are those same legislators going to say when they take a gander at Mullin's pay for 2002?   Then we have Delta's shareholders. It's not merely the negative 58.4 percent return last year that is troubling. It's the reasons underlying that return. In 2002, Delta's revenue dropped to $13.3 billion from $13.9 billion, and it produced an operating loss of $870 million. Its net income was negative $1.3 billion, while its diluted EPS were negative $10.44.

Mullin's Package

For that dismal performance, Mullin:

-- Received a salary of $795,000 -- up from $596,250 in 2001, because he took no salary in the last quarter of that earlier year -- but the same as his salary would have been in 2001 had he not taken a cut. (Delta announced that he had volunteered to take a further reduction in his salary of 10 percent, effective March 1.)

-- Was handed a bonus of $1.4 million, up from zero in 2001.

-- Was awarded $2 million of free stock versus no award in 2001.

-- Was granted three different options covering 963,000 shares with a present value at grant that I estimate to be $8.8 million, up 120.9 percent from his option grant covering 200,000 shares in 2001. More than that, his second and third option grants during the year carried strike prices that were materially lower than his first option grant. If he failed to be motivated by the first grant, what made the compensation committee think he would be motivated by the second and third grants?

Outdoing Them

The only compensation element that decreased in 2002 was a miscellaneous long-term incentive payout, which declined to $456,000 from $1.58 million.   Even so, the total pay for 2002 was $13.5 million, an increase of 119.7 percent over Mullin's pay of $6.2 million for 2001.  Moreover, Mullin's pay doesn't include a cash grant of $2.4 million contingently made to him in January 2002 and subject to his remaining with the company until January 2005. The award is payable no matter what his performance during the period.   Years ago, when Bob Crandall was running AMR Corp., the parent of American Airlines, he deliberately refused salary increases, bonuses and stock option grants, all in an effort to set an example for his pilots and to get them -- unsuccessfully as it turned out -- to cut their pay. Mullin, for his part, seems to have a different philosophy than Crandall: If you can't beat 'em, join 'em -- and outdo them.

Guarding Executive Pensions

Finally, we have the employees, who are worried about pay cuts, and possibly losing their jobs and even their pensions. Bankrupt US Airways Group Inc. has asked the court to relieve it of its pension obligations and to transfer them to the Pension Benefit Guaranty Corp., an arm of the federal government. Various stories suggest that if that happens, some pilots may see their pensions decline by as much as 75 percent.  Apparently, it wasn't just the pilots who were worried about their pensions. It was also Delta's 33 most senior executives. So, to relieve them of their anxieties, the company contributed, or will contribute, monies to outside trusts that will be sufficient to guarantee 60 percent of their future pensions in 2002, 80 percent in 2003 and 100 percent in 2004. That cost Delta a cash outlay in 2002 of $8.2 million for Mullin alone, none of which is included in his total pay for the year of $13.5 million. The use of outside trusts means that even if Delta should go belly-up and even if it should be liquidated, those 33 executives will be assured of receiving their pensions.  An airline that can divert copious quantities of cash to this purpose, by definition, doesn't need any federal help.

The Hat Trick

Equally as interesting on the pension front is that Mullin's years of service for pension calculation purposes isn't the six years that he will have this Aug. 15, but rather is those six years plus 22 more. To most employees, the 60-year-old Mullin is hardly an old hand in the airline business. But to the pension plan, he's a genuine old timer, right up there with the Wright Brothers.   While Mullin has his six real years and 22 phony years of service memorialized in a guaranteed pension plan, his employees may not be faring so well.Delta has announced that for the hoi polloi it is phasing out its defined benefit pension plan, which is based on earnings and years of service, and is moving over a seven-year transition period to a cash balance plan.   Such plans don't guarantee employees any particular level of retirement benefits. Instead, under a typical plan, the company makes contributions, which are then invested according to employee choice. Depending on how those choices turn out, the employees may end up living well in retirement or poorly. In effect, moving from a defined benefit pension plan to a cash balance plan transfers the burden of risk from the company to the employees.  In sum, we have an industry that is trying to stiff Congress, and a board of directors and compensation committee that has already stiffed both its shareholders and its employees. It's not often that you see a hat trick in the world of executive pay.

* *
The members of Delta's board compensation committee include:
- Edward Budd, retired CEO of The Travelers Corp.
- George Fisher, retired CEO of Eastman Kodak Co.
- David Goode, CEO of Norfolk Southern Corp.
- Gerald Grinstein, retired CEO of Burlington Northern Santa Fe Corp.
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StanInvest   Tue, 26  March  2003  4PM

Stan to Stan

Today I heard on the radio that there are speculations on Bay Street that there is a possibility that Hot Air Canada crumbling under the weight of 12B$ debt may seek, ahem:  "creditor's protection"  (quote).    So much for the Yogi bear rally that took it from 2$ low after 11/09/2001, sky high to 8$ and back landing down at below 3.    What did these people count for, who bought  that "stock" and drove it as high as 8$ !?    Day traders? - if institutional day traders were able to drive that tripe so high in the middle of a recession, in the middle of the entire sector depression, in the midst of worldwide travel slump, then the entire stock market is in deeper trouble then we realized.   You can only guess how overvalued must the stock be of the sectors that are NOT in a depression...
I would see now the merit of those analyses which advise people to run like hell from stock, for the time being, and don't even look back.

Stan

StanInvest   Tue, 25  March  2003  3PM

Stan to Stan

I have used the opportunity yesterday to buy more gold under the falling prices.
Quote of the day (from Ned W. Schmidt "Deflationists ignore currencies", http://www.kitco.com/ind/Schmidt/mar242003.html )

Collapsing wages for analysts and investment bankers is not deflation, just justice.

On a different front: the exodus of professionals from most areas of industry and technology seems accelerating.  So many engineers are leaving the profession - it is unbelievable.  Just read a few letters to editor in  EE Times     Have you heard of a good consulting job for nutritionist?
Just kidding.
Stan

StanInvest   Mon, 24  March  2003  8PM

Stan to Stan

Very "impressive" indeed.   I have a deja-vu feeling of the "pozny Gierek" period.  Metoda "dalszego doskonalenia socjalizmu".
Mind you, this could even be worse than it shows, as the companies are allowed now to provide routinely the "pro-forma" figures excluding items than they don't like.

I am also curious as to the statement that the company "has no debt" !  If so then why did it go bankrupt!   Who are the poor souls that they didn't pay!   This is the first time I hear that a company may not pay their suppliers, contractors and employees (I presume) and yet it would not be called a "debt".

There is a stream of more of the same comming out from most businesses.  I am surprized that it hasn't had a bigger impact already on the stock market.  Or may be I am not since we can safely presume that gov must have learned something from 1987.   If they do manage the stock then I have mixed feelings: on one hand I don't blame them as they probably act with the best of intentions to avoid the worse outcome.  At the same time I don't believe they will succeed in the long run.   Although Japanese have "succeeded" for 10 years, but I am pretty sure many of them must wish now they didn't.

Stan

Stanley P. wrote:

You will love this quote (highlight is mine): Kmart (KMRTQ) said it lost $1.1 billion, or $2.13 a share in its fiscal fourth quarter, less than the $3.31 a share in lost in the same period a year ago. Net sales for the quarter ending January declined 18 percent to $8.87 billion, while same-store sales fell 9.8 percent. The bankrupt discount retailer said its cash position was "slightly more than" $1 billion as of Feb. 26, and added that it had no debt. Borrowing availability under its debtor-in-possession facility is approximately $1.55 billion. "Although this Company has a long way to go, we are encouraged by February's financial results, which demonstrate signs of progress, particularly in achieving positive cash flow, controlling costs and enhancing gross margin," said Julian Day, Kmart's chief executive. The stock was last changing hands down a penny at 11 centsStan, I am speechless. What a fantastic results!   S.

StanInvest  Fri, 14  March  2003  1PM

Stan to Stan

BN   Date:   Mon, 10 Mar 2003 13:09:24 -0500
Chcialem Ci zwrocic uwage na zblizajace sie wydarzenie.   Nikkei przelamal bariere 8000 i dalej spada. Pod koniec marca japonskie banki maja koniec roku finansowego.   Rok temu sztucznie podbili indeks do 12500 i wywineli sie. Mysle ze tym razem ten numer sie nie uda. Wszyscy czekaja na wojne wiec nikt nie uwierzy w nagly boom. Oznacza to wielobilionowe straty (write-offs). Wszyscy patrza na Irak, a tymczasem zapasc fikcji japonskiego systemu bankowego bedzie miala znacnie dalej idace konsekwencje. Ich rzad nie ma pieniedzy na "bail-out". Ani Amerykanie ani Europejczycy nie moga pomoc.   Nie potrafie sobie nawet wyobrazic co sie stanie kiedy ich system bankowy padnie.

Translation of the above:  "Nikkei stock index is falling, Japanese banks are in trouble."

My comment:  I have a strong suspicion that Japanese economy is much stronger then people realise and since they have been in a recession in the last 13 years, chances are they will emerge out of it very quickly any time soon.  Their industry is in a much stronger shape than American which you can easily see by the fact that their products are sought after, while American products are not.    They are much closer to Asian manufacturing powerhouse. Contrary to what many business people believe, it is the manufacturing bottom line where the modern economy is based on, not in services.  Countries who believe otherwise are going to repeat the British Empire/ United Kingdom disease.

---------------------------

Subject:         BN
   Date:         Thu, 6 Mar 2003 22:38:47 -0600
   From:       "Stan P."
    To:         "Stan B."

Przeczytaj uwaznie. Ciekawe i nietrywialne.
S

Five Companies That Are Dividend Deadbeats
Wednesday March 5,   By Mark A. Sellers

Dividends are good for the economy.

That's the official word from Robert Arnott and Clifford Asness in their article "Surprise: Higher Dividends = Higher Earnings Growth," which appears in the current edition of the Financial Analysts Journal.   Arnott and Asness, two of the most respected scholars in the financial community, ran the numbers, double-checked them, and then ran them again. In the end, they made a surprising discovery: All else equal, earnings grow faster when companies return a higher percentage of earnings back to shareholders as dividends instead of retaining and reinvesting them in growth opportunities. The finding goes against one of the most basic tenets of modern finance theory: that the more earnings companies retain and plow back into their usinesses, the faster they'll grow.   The authors present a wealth of data to support their conclusions, and even go so far as to compare economy-wide capital expenditures versus the subsequent 10-year growth rate of the U.S. GDP. The conclusion is exactly the same: The more earnings companies reinvest in their businesses, the slower subsequent GDP growth is.    What Arnott and Asness have come up with is statistical evidence of a phenomenon many investors already were aware of:  Executives do dumb things when there's too much cash lying around. They use the excess cash to overinvest in unattractive projects in  pursuit of growth initiatives. They buy this growth using shareholder cash.

The Agency Problem

This behavior can be described as an "agency problem." An agency problem arises when the incentives of managers and shareholders differ.    For example, managers of large companies tend to make higher salaries and enjoy more prominence than managers of small companies. Thus, growing their companies improves both the finances and egos of managers.    What's the easiest way to grow a company? Buying something, of course. Never mind that more than 65% of all acquisitions end up destroying shareholder value in the end. When there's too much cash sitting around, managers often just can't help themselves. Human nature being what it is, the temptation to grow is often too strong.

The Options Effect

Over the past 20 years, the rise of stock options in the United States has exacerbated the agency problem. Stock options give
managers the right, but not the obligation, to purchase a stock tomorrow at today's price. Thus, managers have a huge financial
incentive to get the stock price up. There's nothing wrong with that, is there?   Unfortunately, there is. Options motivate managers to engage in some crazy behaviors. For one, managers have a strong incentive to limit dividend payouts and instead use cash to invest in as many growth projects as possible. These projects often turn out to be unprofitable in the end, but it often takes years for outside shareholders to realize that because they're blinded by the exciting top-line growth shown by the company. By the time the cookie crumbles, insiders have usually cashed out many of their options.  A dividend payout helps curtail this kind of abuse because it helps prevent excess cash from piling up on the balance sheet. Managers who must make regular, fixed dividend payments to shareholders will tend to treat cash as a precious commodity and will invest only in their best ideas. Thus, it seems dividend payments are a check on the agency problem, aligning the interests of managers and shareholders--exactly the opposite of what stock options do.

Buybacks vs. Dividends

Investors are typically excited when a company announces a share buyback. On the surface, that makes perfect sense because perverse U.S. tax laws make dividend payouts unattractive from a tax standpoint; thus, many investors would rather see a company use excess cash to repurchase shares. Share repurchases can be thought of as a dividend payment, with the dividend coming in the form of a capital gain. Theoretically, a company's stock price should rise when it buys back shares because there are fewer shares outstanding to spread over the same level of earnings.   But do buybacks cause stock prices to rise? Unfortunately, it doesn't seem so, at least over the long term. During the past two decades, as companies have used their cash to repurchase shares rather than increase dividends, earnings per share haven't grown faster as a result, as financial theory would predict. In fact, according to the data presented by Arnott and Asness, long-term earnings growth has still remained strongly correlated to dividend payouts.    Why is that? Two reasons. First, when companies have excess cash, it appears they abuse share repurchases just as they abuse investment projects. They tend to buy more shares when they're doing the best from an operational standpoint--precisely the time when the share price is the highest--and stop buying shares during periods of trouble--precisely the time when their share price is lowest. Companies are terrible at investing in their own stock. There are also SEC rules regarding the times when a company can and can't repurchase stock, making it even more difficult for companies to buy low and sell high.    Worse, companies often use buybacks as a way to transfer cash from shareholders to employees by using repurchases to offset stock option dilution. Technology companies such as Microsoft (NasdaqNM:MSFT - News) and Adobe Systems (NasdaqNM:ADBE - News) are notorious for this, but lots of companies do it. In fact, whenever any company buys back stock while at the same time granting stock options to employees, it's essentially paying employees with shareholder money, thus avoiding having to put it on the income statement. Pretty slick, eh?

Show Me the Money!

In my opinion, companies need to start taking dividends more seriously. This means figuring out how much capital they'll need to invest in their most profitable growth opportunities plus a small cushion, with the rest going back to shareholders. This communique isn't aimed at startup biotech firms who need every dollar of cash they can get for expansion. I'm primarily talking about mature, cash-rich, highly profitable companies that have more cash than they know what to do with.     Five companies showed up when I used Morningstar.com's Premium Stock Screener to search for large-cap companies with at least five consecutive years of profits, more than 25% of total assets in cash, and a dividend payout of less than 10% of earnings:

    Microsoft
    Adobe
    Concord EFS (NYSE:CE - News)
    Applied Materials (NasdaqNM:AMAT - News)
    Oracle (NasdaqNM:ORCL - News)

Is it possible that these companies need so much excess cash on their balance sheets, or are their managers hoarding it because of the  agency problem? You decide.     But if I were a large shareholder of any of these firms, I'd have four words to shout at the next annual meeting:    Show me the money!

Mark Sellers is editor of Morningstar StockInvestor (to order a free trial issue, call 800-735-0700). He welcomes e-mail but cannot give personalized investment advice. Reach him at mark_sellers  at morningstar.com.

-------------------------------------

Very intersting article.  I am posting it here for the future reference.  It shows me that the business world has got a leadership problem, above all.

Stan

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Stan Bleszynski

1668 Lakehurst Rd.(Buckhorn), Lakefield
K0L2H0, ON, Canada
(705)657-2419   Fax (705)657-8157
http://www.ptbo.igs.net/~stanb
stanb at ptbo.igs.net

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